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It wasn’t a good day for Nasdaq on Thursday, but it wasn’t terrible either, with all the “carnage” focused in the morning and on low volume.
The jobless claims report was a solid catalyst, but anxiety over United Airlines (UAL) and possible “contagion” from a UAL bankruptcy spoiled the parade. A warning from Gateway (GTW) was a minor factor. There was some disappointment over November retail sales, but that says almost nothing about how holiday sales will fare. There may also be some anxiety over the upcoming “deadline” for the Iraq weapons disclosure declaration.
Mostly people are simply waiting on the sidelines until the market begins to show some renewed strength. But we aren’t seeing continuous waves of selling, so that says that people have very mixed views of where the market will go next.
Nasdaq sold off sharply immediately after opening positively. The suddenness and sharpness of the sell-off inspired more selling. But after hitting a morning low shortly after 11:30 a.m., Nasdaq gradually recovered until 2:10 p.m., when the recovery reversed, but Nasdaq closed less than a point below the morning low.
Volume was light (1.44 billion shares). Breadth was moderately negative, with 1.55 losers for each gainer. It never pays to get too excited over a low-volume day.
According to Thomson Financial I-Watch, institutional investors were net buyers of Sun (SUNW), Cisco (CSCO), Intel (INTC), JDS Uniphase (JDSU), Oracle (ORCL), Nortel (NT), EMC (EMC), Lucent (LU), and Motorola (MOT). The institutions are treating the decline as a buyable dip. Maybe they are wrong, but they don’t usually tend to be too wrong for too long.
The Unemployment Insurance Weekly Claims report registered moderate declines in initial claims (further under 400,000), continuing claims, the 4-week moving average of initial claims (further under 400,000), and the 4-week moving average of continuing claims. This was a positive report. There was a very sharp decline in unadjusted, actual initial claims (but possibly due to the holiday). There was also a moderate decline in the unadjusted, actual continuing claims, which are now 15% below the level a year ago. There is a lot of volatility in these reports, the Thanksgiving holiday may have skewed the results, and it never makes sense to get too excited by one report, but this was a good report.
The Bank of Tokyo-Mitsubishi Chain Store Index for November registered a modest decline compared to a year ago. This was a somewhat negative report, but it’s a difficult comparison since last November had an extra week of post-Thanksgiving holiday sales. Some retailers estimate that up to 5% of November sales will have been shifted into December. BTM estimates that 2% of November sales will have been shifted into December.
After the close: AMG Data Services reports that for the week ended Wednesday, December 4, $2.1 billion flowed out of equity funds, but 80% of those outflows were from non-domestic funds. This was a negative report. $1.2 billion flowed into taxable bond funds. $116 million flowed into municipal bond funds. $23.8 billion flowed into money market funds.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 6.66% on Thursday to 34.28, which is in the upper half of the high anxiety zone (30 to 35). Clearly people are more anxious that we aren’t seeing any bounce after the recent declines.
The high level of VIX remains a contrarian bullish indicator, but the market could decline further before rallying again.
The Nasdaq-100 After Hours Indicator had a positive tone for the Thursday evening session, closing up 1.03 points. People were modestly satisfied that Intel raised Q4 guidance (“a nice uplift that we weren't expecting”), but were disappointed that the company couldn’t give visibility into 2003.
Fed funds futures suggest a 9% (unchanged) chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the December 10 FOMC meeting.
Fed funds futures suggest an 8% (unchanged) chance of a quarter-point rate cut by the January FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the January 28/29 FOMC meeting.
The dollar rose modestly against the yen and fell slightly against the euro.
[UPDATED 7/23/02] There are still no signs of any economic fundamentals that would make either Europe or Japan dramatically more attractive than the U.S. for long-term investment. Rather, the relative weakening of the dollar has been primarily driven by speculative currency trading and sentiment (such as the accounting scandals) and that sentiment will most likely reverse over the coming months as the forces depressing sentiment dissipate.
[UPDATED 7/23/02] In any case, the dollar is still quite sound and no true investor should lose any sleep worrying about potential negative implications from a weaker dollar. And, a weaker dollar will boost U.S. exports.
The price of oil rose moderately sharply, but is still well below the psychological $30 level. The nominal cause of the gain was a worsening of the strike in Venezuela. Their oil exports are virtually (if not completely) shut down and much of their oil normally flows to the U.S.
[UPDATED 7/23/02] In any case, the price of oil price continues to be well-behaved and no true investor should lose any sleep worrying about it.
The price of gold rose moderately. It is still below the June high, but not by a wide margin. It will run into ‘resistance’ soon, so unless it truly breaks out, it will quickly succumb to profit-taking. Perceived anxiety over Iraq by speculators may be the motivating factor.
[UPDATED 12/6/02] The last peak was the June 2 closing high of $327 and the June 3 intraday high of $331.
[UPDATED 7/23/02] In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[UPDATED 7/6/02] The relative calm continues.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[UPDATED 10/14/02] The eerie calm continues. There may continue to be attacks or alleged attacks abroad, but the U.S. “homeland” may be relatively immune, at least for now.
There had been veiled threats from al Qaeda that there would be renewed attacks after the end of the Ramadan Muslim holy season, which was yesterday and today, but most likely any attacks would be abroad and focused in the Middle East, Saudi Arabia, Yemen, Africa, and Asia, but not the U.S. “homeland”.
Responding to a CNN QuickVote poll that asks “Has news that Osama bin Laden and Mullah Omar might be alive affected your concerns about terror attacks?”, 42% say more concerned, 4% say less concerned, and 55% say not concerned.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
Everybody is waiting for the Iraqi weapons disclosure declaration which the Iraqis have said they will proffer on Saturday, but probably won’t be available at the New York UN office until Sunday, and it could take up to 10 days to translate and analyze the document depending on how much of it is in Arabic. The Iraqis have indicated that it is unlikely that the declaration will say anything about actual weapons of mass destruction, but will focus on “dual use” materials, technologies, and programs.
The White House says that they have “solid” evidence of the existence of Iraqi weapons of mass destruction. They say they will provide evidence to the inspectors, but it would appear that they have not done so yet. Presumably they want to wait until after Iraq submits its declaration, so that the U.S. can legitimately say “See, they lied again”. This is great rhetoric, but it is unclear whether it would have any impact on the inspections process. Presumably the inspectors would visit the sites indicated in the U.S. evidence and verify if in fact weapons exist at those sites. Presumably Iraq would cooperate on such visits, so it is unclear if the U.S. would have any strong cause to go to war if the Iraqis ultimately cooperate with the inspectors in disarming of any weapons found on the basis of U.S. evidence. In any case, there is bound to be some anxiety as confusion abounds over these issues and interpretations.
For the week ending December 4, the Pentagon reports that 318 fewer reservists are on active duty, for a total of 50,755. There is still no sign of any large-scale call-up that would be required well in advance of an all-out military conflict with Iraq.
[UPDATED 10/11/02] My assessment remains that there is virtually no chance of an all-out military conflict with Iraq this year and only a 20% chance next year.
[UPDATED 9/16/02] The bottom line is that investor concern over the sluggish economic recovery and weakness in corporate revenue and earnings growth still weigh more heavily on the market than all the other non-economic factors. Traders merely use Iraq, et al as excuses for any market weakness.
Click here for our more extensive commentary on The Iraq Problem.
Click here for our more extensive commentary on Technology.
The three-day hearing in the Sun v. Microsoft private antitrust case finished up on Thursday. There was no indication when the judge might rule on Sun’s request for a preliminary injunction, but the judge did make comments suggesting that he was not convinced of the imminent need for an injunction to force Microsoft to distribute Java. Note that Microsoft already distributes a version of Java that was licensed from Sun, but has already indicated that distribution will cease in 2004.
[UPDATED 8/5/02] Check out our book list.
[UPDATED 7/23/02] Absolutely nothing more is needed at this point other than to simply let the current market-driven corrective processes play themselves out.
Click here for our more extensive commentary on financial reform.
Corning (GLW) provided this view of the telecom sector in a press release on Q4 charges: “Our outlook does not anticipate any significant growth in the telecommunications segment until late 2004. However, we expect longer term improvement as bandwidth demand continues to grow absorbing existing network capacity. This recovery could be enhanced by public policy changes, consolidation of the industry and the introduction of new broadband applications.”
Click here for our more extensive commentary on The Telecom Problem.
Bankruptcy seems the preferred route for United Airlines (UAL). Their cost structure and debt load is simply unmanageable. A reorganized, debt-free UAL will be profitable and once again be able to invest in new planes and technology. It will be interesting to see what happens to labor compensation in the reorganized company. I suppose it is also possible that the remnants of United could be merged into one of the remaining, healthier carriers. Or at least a major chunk of United or its assets could be sold off. Bankruptcy sounds like such a bad thing, but it is really a good thing for the overall economy and the particular sub-sector of the economy.
I attended a small conference on the topic of Trade Policy and ‘Safeguards’ at the American Enterprise Institute here in Washington, D.C. Safeguards are one of the remedies that can be applied when the U.S. decides that one or more foreign counties are engaging in unfair trade. Safeguards are supposed to be temporary and the industry is supposed to present a restructuring plan, but there is no enforcement of the plan. President Bush chose to use a safeguard to deal with problems with steel imports. Quite a number of countries are challenging the U.S. steel safeguard at the WTO, and many people (even here in Washington) expect that the safeguard will be found to be unfair, but it has already accomplished most of its (political) purpose, so it’s no big deal if it goes away. It is unfortunate that this particular safeguard was used, since the U.S. economy would be better off if some more steel companies went bankrupt and reorganized into profitable businesses.
I actually sold some of my LEAPS. These were January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $14 that matched the $20 LEAPS I bought on Tuesday. This process is known as “rolling up”. I should have sold them on Tuesday when I bought the matching replacements, but I bet that the market would bounce back quicker and it didn’t. It was not my intention to hold the doubled-up leverage for more than a few days. Three days of market declines were my limit for holding that extra position. The rolling up process is part of my long-term investment plan, but temporarily holding both positions was simply a short-term trade (which is not my main intention). My market value is now lower, but I have the same exposure to the market (same number of option contracts) but with more in cash now.
[UPDATED 12/6/02] The main focus of the market is now on the technical issue of whether the rally is merely correcting before continuing or is fully reversing and will continue to fall. It does look like institutions and “professional investors” (i.e., short/medium-term traders) are doing a fair amount of profit-taking, but it may simply be a changing of the guard as the early birds “retire” and the late-bloomers gradually wade deeper into the market.
The sell-off could continue, but Nasdaq is already oversold on a short-term technical basis and overdue for a bounce.
It’s a Friday, so short-term traders will tend to close out positions in advance of the weekend. Although with Iraq issuing its weapons disclosure declaration on the weekend, it’s difficult to say how short-term traders will want to be positioned for Monday. Traders may assume that the declaration will lead to bad news, but it could also lead to good news.
The November employment report will be the big focus this morning. Whether it will be the catalyst to make or break the market remains to be seen.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -20 on Thursday, well above the lower end of my range of -40 to +50. The market continues to be so crazy that it could go either way, but I still believe there is a longer-term upwards bias even if the near-term bias is all over the map.
[UPDATED 12/6/02] The rally is now 40 days old, and 5 days off its peak. I’ll give the market five more days before concluding whether we’re truly back to a bear market or just in a trading range (or, heaven forbid, starting on a new bull market). The September 21, 2001 closing level of 1423.19 collapsed on Thursday, which is not a good sign, but not completely fatal. It’s going to take some determined buying to push past all this resistance. If Nasdaq can’t break out by the middle of next week, the entire rally could fizzle and evaporate. It is looking a little gloomy, but Nasdaq still has a good shot at breaking out for a solid year-end “Santa Claus” rally.
[UPDATED 9/25/02] Technically, we are back in a bear market (as of Monday, 9/23) since we have broken below the July 24 low. But whether we continue downwards depends on whether the recent declines were driven by ‘real’ selling or simply due to short-selling. Short-sellers do eventually have to buy their borrowed shares back. The lofty level of the market Volatility Index (VIX) suggests that professional investors are bracing for the worst. That sounds bad, but frequently, those precautions are a harbinger of a turn in the market. The only question is whether the turn occurs within the next few days, a few weeks or a few months.
[UPDATED 8/22/02] The incredible level of disbelief in the current rally strongly suggests that a contrarian bullish view may be appropriate. It’s the exact flip-side of where we were in April and May of 2000 when people refused to belief that the bull market was over and that a bear market had begun.
[UPDATED 6/24/02] Regardless of how crazy the market behaves, the economic recovery is well underway. Market participants may not yet be ready to acknowledge the recovery, but it is inevitable, even if the timing is uncertain. There are more than enough differences in the current market cycle than any in recent memory, but inevitably the market will rise as people anticipate earnings growth down the road. Investing for the long term is still an excellent strategy even if it feels painful in the near term.
[UPDATED 6/24/02] The market will rally when the selling peters out. The market religiously obeys the law of supply and demand, but many buyers have a habit of waiting until the sellers exhaust themselves.
[UPDATED 11/9/02] The ECRI Weekly Leading Index (WLI) tells us that the economy is starting to pick up a little. Not enough to make people happy, but enough to offer encouragement that neither a double-dip recession nor deflation are in our cards.
[UPDATED 10/21/02] The economy is looking even more mixed than before. Although there are plenty of signs of weakness, there are increasingly tantalizing tidbits of improvement. Here in New York, street traffic and business in restaurants has dramatically picked up. In fact, quite a number of new restaurants have opened, with more on the way. And this is despite the weakness on Wall Street. In Q3 tech profits and Q4 guidance, there is certainly a fair amount of weakness, but there have also been quite a number of bright spots, even if they are small bright spots. I suspect that a number of companies did their best to get as much bad news out as possible so that Q4 would be as strong as possible. I also went back and looked at the September Employment report and noticed that the loss of 43,000 non-farm payroll jobs was actually a 478,000 gain once you remove the seasonal adjustment. It turns out that the change from August to September varies widely over the years, so the seasonal adjustment is rather harsh. And finally, the 400,000 “threshold” for initial unemployment claims is not as hard a boundary as it seems, and 401,000 to 425,000 over the past seven weeks probably does not indicate a true employment contraction since the population and workforce have been growing over the years since the 400,000 rule of thumb was concocted. The bottom line is that the economy is hanging in there and even growing a little, even if it is not up to its full potential.
[UPDATED 11/7/02] I’ve decreased my estimate of the probability of a double-dip recession to 10% (from 20%) due to hefty half-point Fed rate cut. I still think a double-dip is unlikely, but I do want to quantify my beliefs as well as risks.
[UPDATED 6/24/02] There is absolutely no question that the economic recovery in the U.S. is going at a somewhat slower pace than had been expected by this point in time, but the recovery is well along nonetheless. We are still winding our way through an extended turning point, but virtually every day brings news that we are making incremental progress, even as there are still plenty of negative data points as well. Impatient observers fail to recognize that turning points are bumpy affairs and that negative data points do not necessarily mean that something has gone wrong.
[UPDATED 6/24/02] Spending on technology has picked up only modestly, at best. And the telecom sector continues to decline. That said, the recovery is in fact well along, with the manufacturing sector leading the way. Manufacturers have plenty of excess capacity so that they can increase production without spending too much and without needing to hire many workers, yet.
[UPDATED 6/24/02] Even as unemployment continues to rise modestly, actual employment has already begun to rise, although at a very modest pace. The average paycheck has also been rising, and at a rate faster than inflation. That combination of more people working with larger paychecks means that overall national income is rising, which is a very good thing and will continue to fuel consumer spending.
[UPDATED 6/24/02] Companies are reluctant to dramatically increase their spending on technology until they become more comfortable that ‘final demand’ is increasing at a dependable pace. Demand is increasing, but at a slow enough pace that companies are proceeding with great caution. But as each day goes by, an additional increment of that caution evaporates. It may be as painful as watching grass grow or watching paint dry, but investors can be sure that their patience will be rewarded. Sure, it will take some time to get back to ‘normal’, but that result is inevitable even if the timing is uncertain.
[UPDATED 11/11/02] I don’t yet have a forecast for Q4 GDP. The accounting is so inscrutable as to defy any rational forecast. People expect economic activity to slow dramatically from the pace of Q3, so real GDP growth in the range of -0.5% to 2.5% (midpoint is 1.0%) is possible. Actually, a survey of economists by The Economist shows an expectation for real GDP growth in 2002 of 2.4% (low of 2.3 to 2.6), which implies Q4 GDP growth of 0.2% (low of -0.2 to 1.0). The same survey forecast real GDP growth of 2.7% in 2003 (low of 2.1 to 3.3). There was no hint or suggestion of deflation in these survey results.
[UPDATED 11/27/02] A panel of professional forecasters of the National Association for Business Economics (NABE) estimates that real Q4 GDP should grow at a rate of 1.4%. Q1 GDP should grow at a 2.5% rate. Full year 2003 GDP should grow at a rate approaching 3%. The survey was taken from November 9th to 14th.
[UPDATED 11/8/02] The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is still uncertain whether the recession truly ended of whether the end was merely temporary with a second dip to follow. In their words (as of November 5), “The behavior of the economy in the first eight months of 2002 indicates that the decline in activity that began last year may have come to an end. But recent data indicate that additional time is needed to be confident about the interpretation of the movements of the economy last year and this year.”
[UPDATED 8/14/02] We are still in the turning point where the view in front of your nose is mixed and confusing. Recent economic reports have been weak or mixed, so we probably need another month of data to be able to see where we are going. For me personally, it’s a no-brainer that we very close to the final edge of the turning point, but so many people have lost confidence that they need a truly monumental level of evidence to believe again. But that’s always the way it is with turning points: it’s darkest before the dawn.
[UPDATED 8/24/02] I’ve reset the Tech Stock ‘Safe’ Signal back to 0.00 since it has the last change is over six weeks old. There needs to be a sense of ‘freshness’ to the outlook for tech business that simply isn’t there right now.
[UPDATED 8/24/02] Our ‘safe’ signal requires at least 20% (1 out of 5, or 10 out of 50) of the top 50 tech companies to signal acceleration. Expect one or two quarters to elapse from the time of the first indications of an upturn and the return of solid growth. The theory is that the stock market should begin a sustainable rally four to six months in advance of the return of strong growth. Many companies are still trimming Q3 forecasts, and virtually nobody is beating the drum for a great Q4. A lot of people are saying that even Q1 of 2003 will be sluggish. That said, if you want to get the early stock market gains, you'll have to jump the gun and get in before our signal triggers. But if you do, you have to be prepared for some significant volatility and possibly some big losses. You have to decide for yourself whether you want safety in the short run or higher potential returns in the long run.
[UPDATED 9/14/02] For our complete list of resources, click here.
[NEW 5/25/02] DISCLAIMER: I cannot and do not offer any recommendations of stocks to buy or sell. I may on occasion discuss companies that I am considering or myself have bought or sold, but the reader must do their own research before making their own purchase or sale decision. It is never a good idea to buy a stock just because someone else tells you to or even merely mentions a company in a favorable light.
Jack Krupansky -- The Unrepentant Optimist (Click here for Jack's Bio)
Updated: December 05, 2002 11:48:49 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology